Lending institutions provide construction loans by which contractors fund the purchase of building materials and labor for erecting buildings. Buildings being constructed pass through various phases, from clearing land, foundation, framing, interior construction, installation of fixtures, painting and flooring, and completion activities. Each phase reflects an increasing amount of capital investment necessary to fund the building materials and labor for construction using the building materials. The funds required for the building materials and labor are drawn by the contractor from the loan approved in advance by the lending institution for the particular construction project. Often, contractors have a number of on-going construction projects; for example, a number of individual residential houses being constructed at one or more subdivisions. Each project is subject to a separate construction loan.
The lending institution is concerned with repayment of the construction loan. Typically, construction loans are repaid at a closing when the purchaser accepts the constructed property and makes payment for the purchase and sale of the constructed property. For most purchasers, the construction loan made by the lending institution is paid from proceeds derived by the purchaser from a purchase money loan from a lending institution. The purchase money loan is then subject to the repayment terms of the loan. During construction, however, the contractor opening the construction loan is responsible for repayment of funds advanced from the lending institution to the contractor. As discussed above, the construction activities by the contractor reflect increased financial exposure by the lending institution to a partially-constructed building. To assure repayment of the advanced funds in the event of failure to complete the construction project, lending institutions require the contractor have adequate insurance for destruction or loss incurred to the partially constructed building during the course of constructing the project for which the lending institution is advancing funds. The lending institution also periodically inspects the property to assure that the funds being advanced to the contractor are being used to provide the building materials and labor for the construction of the building.
Generally, construction projects are protected under an insurance policy known as a builders' risk insurance policy. This insurance policy is written by an insurance carrier for each of the particular individual projects. The insurance policy is made in the name of either the contractor, the owner, or both of these parties, and provides that the lending institution funding the construction is listed as the as the mortgagee or loss payee. In the event of a documented loss such as destruction of the partially constructed building during the course of construction, the proceeds of the insurance policy are paid to the lending institution. Each project accordingly is subject to not only a separate construction loan from a lending institution, but also to a separate insurance policy from an insurance carrier.
While the described construction loan insurance program has been long used for construction project, there are drawbacks to this. This method of protection involves many individual short term policies. Also, there is a lack of uniform insurance coverage related to the value of the construction and the value of the advanced funds. This method of protection has a high level of dependency on the contractor and/or owner/borrower to initiate and maintain coverage when the lending institution is the party with the most capital at risk. Such insurance mechanism, while widely practiced, is not only inefficient, but exposes the banking system to undue risk.
Accordingly, there is a need in the art for an improved construction loan insurance apparatus and method directed to minimizing the deficiencies in the present collateral loan insurance programs. It is to such that the present invention is directed.